Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

Bank Credit Expansion and Its Effects on the Economic System 381In summary, we have described the microeconomic basisfor the spontaneous market reaction which consistently tendsto follow credit expansion. This reaction gives rise to the consecutivecycles of boom and recession which have regularlyaffected western economies for nearly two centuries (andeven much longer, as we saw in chapter 2). We have alsodemonstrated that there is no theoretical possibility that banks’production structure. (2) Capital values in general—i.e., anticipatedvalues of the future income—are reduced by higherrates of capitalization; the owners of capital goods and propertyrights experience, therefore, serious losses. (3) The specificcapital goods serviceable as “complementary” equipmentfor those lines of production which would correspondto the consumers’ demand are probably not ready; employmentin these lines is, therefore, smaller than it could be otherwise.(4) Marginal-value productivity of labour in shortenedinvestment periods is lower, wage rates are, therefore,depressed. (5) Under inflexible wage rates unemploymentensues from the decreased demand prices for labour. (SeeFritz Machlup, “Professor Knight and the ‘Period of Production,’”Journal of Political Economy 43, no. 5 [October 1935]:623)The comments of Ludwig von Mises regarding the possibility that thenew productive structure will resemble the one which existed prior tocredit expansion are perhaps even more specific:These data, however, are no longer identical with those thatprevailed on the eve of the expansionist process. A goodmany things have changed. Forced saving and, to an evengreater extent, regular voluntary saving may have providednew capital goods which were not totally squanderedthrough malinvestment and overconsumption as induced bythe boom. Changes in the wealth and income of various individualsand groups of individuals have been brought aboutby the unevenness inherent in every inflationary movement.Apart from any causal relation to the credit expansion, populationmay have changed with regard to figures and thecharacteristics of the individuals comprising them; technologicalknowledge may have advanced, demand for certaingoods may have been altered. The final state to the establishmentof which the market tends is no longer the same towardwhich it tended before the disturbances created by the creditexpansion. (Mises, Human Action, p. 563)